Family Business ~ Insight | Are New Zealand Businesses going to feel the effect of the Australian Economic Slow Down?

We all know from experience that it can be hard growing up with an over achieving older sibling.  Often it is hard to live up to what they have achieved and higher expectations are often shifted on to the younger sibling to achieve a similar level.  In economic terms New Zealand is the younger sibling of Australia.  For years we have underachieved relative to the Australian economy with its massive mineral wealth and perception as the lucky land.  The New Zealand schools and universities are proved training grounds for capable people to leave the country and go and find fame and fortune in the bright sunshine of Australia.

When the GFC hit a few years ago, New Zealand businesses were quick to adapt and generally rode out the recession much better than previous ones.  Banks acted sooner and we have seen overall less receiverships and liquidations of high profile businesses than we perhaps all expected, although the finance companies and unit trusts certainly made up for some of that in part.

Now that Australia is no longer the lucky land, it is facing economic downturn and uncertain times.  The sad reality however is that while the older sibling is struggling, this is going to have some major economic consequences for its younger sibling being New Zealand.

We have already seen several cases where existing profitable New Zealand operations are having costs cut simply because the Australian parent or head office needs to get its affairs in order.  It is often easier to trim the limb off than it is to prune the tree and as such costs are often cut in New Zealand notwithstanding that the New Zealand business operation is healthy and profitable, and has already gone through cost cutting several years ago.  It is far easier for Australian bosses to get rid of people they don’t really know in New Zealand than the guy or girl sitting down the hall.

In our opinion there is going to be a significant flow on effect into the New Zealand economy from the downturn in Australia.  There are some positives in this in that at least some of our brighter talent may no longer pack their bags and leave school and university to go and work in Australia.  However, our export markets will reduce and as noted where our New Zealand businesses are branches of subsidiaries of Australian entities, cost cutting is likely to be the measure for New Zealand again as Australia needs to go through it to get its books in order.

While Asia may be the great white hope for our future of exports, particularly for companies like Fonterra and those in the primary sector, Australia does show that you cannot rely on one country or even one region for your economic prosperity and independence.  New Zealand needs to be careful and make sure that we don’t put all our money on a single bet and that as an economy we choose to diversify as much as we can.  New Zealand produces mainly only primary sector exports of any great significance these days, with its only other economic benefit being tourism.  How New Zealand businesses strategize internationally is going to become increasingly important over the next few years.

Finally, the Reserve Bank has indicated that at some stage in the not too distant future interest rates will indeed go up.  The New Zealand Herald even ran a front page article a few weekends ago noting that interests rates were picked to get as high as 7% or even 8% again in the foreseeable future.  With many New Zealanders having borrowed large sums of money at cheap interest rates, the economic reality is going to hit home hard in the not too distant future if those rates increases do occur.  It is important for those who borrowed money, especially those who borrowed funds at floating interest rates, to watch the yield girth and the outlook from the Reserve Bank.  At some stage in the next six months those that are floating need to seriously look at locking long term fixed interest rates while they are available at relatively low levels.  Often a strategy of spreading a single borrowing over multiple terms and fixed interest rate periods is good because when each part then comes up in the future, you are not dealing with the whole of the loan and in relation to where the interest rate cycle is at.

The final piece to this puzzle is the housing market.  In the past inflation has taken care of effectively borrowing costs by diluting the debt percentages as time goes by, even if principle is not repaid.  If the rate of inflation in housing prices decreases then the economic benefits of borrowing large are not necessarily going to be there.  People certainly need to be careful when considering the levels of their debt and the affordability of current interest rates when making economic decisions.  As always, we are happy to sit down and discuss these matters with clients to ensure that they understand the risks that they take when they borrow significant amounts of funds.  Appropriate structuring is also important to ensure that interest is tax deductible to the greatest extent possible.

2013 may be half gone, but the second half of it is probably going to be the more interesting half of the year.  Talk to you all soon.

Kind regards

Nigel

Family Business ~ Insight | Are you going to be Impacted with the Changes to Land Related Lease Payments?

You may or may not be aware that the government introduced a bill [Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Bill on 13 September 2012 that advocates the amendment to the tax treatment of Lease inducements and lease surrender payments, this has passed its second reading and is currently before the Committee. During April 2013 the IRD released an issues paper that proposes further changes to the taxation of land-related lease payments. These changes follow the lease inducement and lease surrender proposal and should apply from 1 April of the year following the enactment of the legislation. These proposed rules will supplement and follow the treatment of the proposed changes in relation to lease inducement and lease surrender payments.

Currently there is a mismatch in the treatment of lease transfer payments between the exiting and incoming tenant. The lease transfer payments are generally deductible to the incoming tenant under the depreciation rules and non-taxable to the exiting tenant. The issue here is that should the rules remain unchanged the tenant could chose to exit the lease by transferring it in exchange for a tax free payment, as opposed to surrendering the lease to the landlord in exchange for a taxable payment.

It is proposed that new generic income, deduction and timing rules for all land related lease payments be introduced. These rules will apply to all leases other than residential. This will result in any land related lease to be taxable to the recipient and deductible to the payer.

Summary of proposed new rules:

  • The new rules will apply only to land rights (leases or licences of land) that have a term of less than 50 years. Payments made in relation to a land right that lasts more than 50 years will be treated as a payment made in relation to freehold estate. It should be noted that the 50 year term does not include the period of renewal or extension
  • Income and deductions will have to be spread over the term of the relevant land right.
  • Land related lease payments will include but are not limited to:
    • Fine
    • Lease transfer payments
    • Payments for a grant or termination of a lease
    • Payment of a liability for the breach of a covenant
    • Payments to modify or waive the terms of the lease
    • Contributions towards fitout
    • Goodwill of business where the goodwill is attached to land rather than personal goodwill

Whilst the taxpayers will no longer have the possibility to re-characterise certain payments with the view to achieve desired tax outcome, the introduction of these rules is welcome, as it will take away the uncertainties.

If you are thinking of entering into a lease or exiting a lease please talk to us so that we can assess whether any of these changes will have an impact on you.

Family Business ~ Insight | How Prepared are you for the new Taxation Rules for Foreign Superannuation?

The Taxation (Annual Rates, Foreign Superannuation and Remedial Matters) Bill (112-1) was introduced into Parliament on 20th May 2013.

The Bill includes proposals to reform the taxation of foreign superannuation. It is specifically targeted at lump sums received. The new rules, if passed in current form, will come into effect on 01 April 2014. The aim of this reform is to make the rules simpler, less confusing and easier to comply with.

Currently, depending on the type of superannuation, it can be taxed under an accrual foreign investment fund (FIF) rules or on receipt.  The different treatment can cause headaches for taxpayers.

The Bill proposes that the interests in foreign superannuation will no longer be taxable under the FIF rules, but at the time distributions are received.  These new rules will affect people who are working as well as those who have already retired. The new rules will apply to distributions, cash withdrawals from the foreign superannuation scheme and the transfer of an interest in a foreign superannuation scheme to a superannuation scheme in Australia and in New Zealand

Those who have accounted for their interests in foreign superannuation under FIF rules will be able to do so going forward.

The Commissioner is aware that a number of taxpayers, that have made a withdrawal from foreign superannuation in cash or have transferred amounts from their foreign superannuation to NZ or Australian superannuation between 01 Jan 2000 and 31 March 2014, have not complied with their income tax obligations under current rules. These taxpayers will have an option to become compliant either by applying the current rules and paying the appropriate interest & penalties. Alternatively, they may return 15% of a previous withdrawal as assessable income in a future income tax return.

While these rules are still in a preliminary form, it is prudent to consider whether they would affect you. Should you have interest in a foreign superannuation which has not been disclosed to the IRD, or if you think that you may be affected by the proposed changes please contact us so that we can assess how the rules apply to you.

Family Business ~ Insight | Do you know what your Tax Consequences will be with the Proposed Changes to the Auckland Unitary Plan?

Anyone who lives in Auckland will be well aware that the Auckland Council is currently reviewing what is called the Auckland Unitary Plan.  This is a plan that sets out the future for Auckland and basically governs what can be built where.

What many people don’t realise however is that any changes to the unitary plan could indeed leave taxpayers facing a tax bill when they dispose of land.

Section CB14 of the Income Tax Act 2007 provides that an amount derived on the sale of land will be taxable if:

1    The amounts not already taxable under another section.

2    It was disposed of within 10 years of acquisition.

3    They disposed of it for a gain.

4    At least 20% of the gain arises from a factor, or one or more factors, that are as follows:

a    Changes to the rules of an operative district plan under the Resource Management Act 1991;

b    The likelihood of such changes;

i     A consent granted under the Resource Management Act 1991;

ii     A likelihood of a consent being granted under the Resource Management Act;

iii    An occurrence of any similar nature to any of these or the likelihood of one of those happening.

What this means in effect, is that if land is disposed of within 10 years of acquisition and at least 20% of the gain made is due to the actual or likely change of the Auckland Unitary Plan, then the whole of the gain is subject to tax.  In turn, for each complete one year of ownership, 10% of the gain becomes non-taxable so effectively after 9 years only 10% of the gain is taxable.

The good news is however that there are number of exemptions which do apply, namely:

1    Section CB18 which applies where the person who acquires the land and used it or intended to use it for residential purposes; and they disposed of the land to another person who acquires it for residential purposes.  However, there is no exemption for trusts in this provision and as such it will only apply where individuals own the land, not companies as well.

2    In CB22 there is a similar exemption for farm land.  This gain applies where the land was acquired by an individual or their spouse or de facto partner for use in a farming business, and it is disposed of to another person for the same use.

Accordingly, care should be taken when selling land to determine whether there is any application of section CB14.  Clearly many taxpayers could get caught out unawares.  It will be interesting to see what the IRD does and whether it goes on a fishing expedition.

Family Business ~ Insight | Does your Body Corporate carry out a Taxable Activity?

There have been differing views as to whether a Body Corporate carries on a taxable activity and whether it can or is required to register for GST purposes. As a result of this uncertainty there have been differing practices.

The IRD has recently issued a consultation document in which they have reached a preliminary view that a Body Corporate carries on a taxable activity as it makes supplies of services to the owners of unit titles, who provide consideration for these services by payment of body corporate levies. The Body Corporate is a separate legal entity from the owners of the Unit Titles. Consequently a Body Corporate is required to register for GST if its taxable supplies exceed the $ 60,000 threshold. Body Corporates whose supply does not exceed $ 60,000 can voluntarily register for GST purposes.

This preliminary view is being consulted on as this conclusion reached by the Commissioner is not completely free from doubt.

This will be particularly relevant, if the Commissioner’s view is confirmed, as the Body Corporate does not have to return GST on any damages settlements they receive, yet will still be able to recover GST on the costs they incur in making good the property. By comparison, insurance payouts are expressly subject to GST.

As an interim measure until this matter is finalised and a final view is formed, the following applies:

  • A Body Corporate is not required to register for GST regardless whether the value of supplies exceed the registration threshold of $ 60,000
  • However a Body Corporate may choose to register for GST purposes. This registration will be effective from the date of registration and cannot be backdated.
  • If it is ultimately determined that all Body Corporates are required to register for GST purposes further consideration will be given as to the effective date of registration
  • If it is ultimately determined that Bodies Corporate do not undertake taxable activities, those registered will be deregistered. This may result in a GST output tax liability.

 

If you are about to receive a compensation from the insurance company or a third party or you are contemplating whether to register a Body Corporate for GST, we recommend that you come and speak to us, so that we can assess whether and how these rules will apply to your particular circumstances.  One of the directors of our sister company Private Accounting Ltd, Barry Tuck, has had significant experience in advising and representing Bodies Corporate in GST matters.

Family Business ~ Insight | Are you Struggling with the Decision on when is the Best Time to Sell your Business?

We are all getting older. The reality of this is that while many baby boomers have deferred the sale of their businesses given the impact of the Global Financial Crisis. Time is marching on for them. As a result many are now facing the reality that it is time to sell the family business and retire, while they have reasonable health and time to do the things they have always dreamt of.

Fortunately the reality for these business owners is that there are plenty of willing buyers out there looking. Moreover, the prices are not too bad either, even if the heady PE’s of the 2000’s are no longer being achieved.

Many business owners did try to get the best of both world by having a high powered CEO and agreeing to share with them part of the gain in value that they created. Sadly however the reality is that most of the CEO’s simply did not achieve their promises, and often left the businesses in worse shape than when they started.

So we are busy working with our clients to prepare their businesses for sale, and to maximise the amount they receive on the sale. Then we are helping them plan how to manage and invest the proceeds, and more importantly what they will be doing to fill the void in their lives. For many, that won’t be hard.

That just leaves us to discuss the question of generational wealth succession with them: how much they want to ultimately give to their kids, and how we educate them to manage that. Charitable purposes will normally account for the balance.

So if you are at the cross roads of deciding what to do with your business either give us a call or at least review our white paper – The Multi-Million Dollar Dilemma

Family Business ~ Insight | Do you know about the New Requirements for Directors of NZ Companies and General Partners of NZ Limited Partnerships

The Companies and Limited Partnership Bill (Bill) introduces major changes to company director and general partner requirements. The purpose of this update is to highlight some of the key changes that may affect you. The changes highlighted below apply to New Zealand companies registered under the Companies Act 1993 and General Partners of New Zealand Limited Partnerships registered under the Limited Partnership Act 2008. These proposed requirements apply equally to newly incorporated as well as existing Companies and Limited Partnerships.

COMPANIES

Director’s residence

The Bill proposes that every company must have at least one director who:

  • Lives in New Zealand, or
  • Lives in a country with which New Zealand has a reciprocal  arrangement for enforcement of New Zealand judgments and criminal fines

It should be noted that the requirement is that at least one director and not all directors must live in New Zealand. As a result a company can have a mixture of New Zealand and foreign resident directors. There is no requirement that the director be a New Zealand citizen, although the residency status will probably be relevant.

The purpose of this enactment is to ensure that there is an identifiable individual in New Zealand who can be held accountable for the actions of the company.

Existing companies will have to comply with this requirement within 6 months of the enactment of the Bill. Failure to do so can result in the removal of the company from the Company Registry.

Director’s additional information requirements

At present the information that is needed to be provided to the Registrar of Companies in New Zealand in respect of directors is fairly limited. The only information that was required to be provided is residential details. The Bill proposes that every director provide his/her date and place of birth.  This requirement will apply to newly incorporated as well as existing companies. Failure to comply with this requirement will result in penalties / fines. Whilst this additional information will be held by the Registrar of Companies it will not be available to public.

The Ultimate Holding Company

The Bill also proposes that details of company’s ultimate holding company be disclosed upon registration. The disclosure is in relation to the name of the ultimate holding company, country of registration, company registration number, and it’s registered address.  There will also be the requirement to disclose the name, address and date of birth of each of the directors of the ultimate holding company. Any changes to any of these particulars must be registered within 20 working days with the Registrar of Companies.

The purpose of this disclosure is to allow for greater transparency and allow those dealing with the New Zealand company to be able to determine where the control over the company ultimately lies.

LIMITED PARTNERSHIPS

General Partner’s residence

Similarly with company directors the Bill proposes that every Limited Partnership must have at least one General Partner who:

a)      is a natural person:

  • Lives in New Zealand, or
  • Lives in a country with which New Zealand has a reciprocal arrangement for enforcement of low level criminal fines, or

b)      Is a partner in a general partnership that complies with a) above, or

c)       Is a company registered under Companies Act 1993

In cases where the general partner is a New Zealand incorporated company, it will have to have at least one New Zealand resident director who will have to comply with residency and additional disclosure requirements.

In cases where the general partner is an individual, the persons full name, date and place of birth and residential address will need to be provided to the Registrar of Companies.

The Ultimate Holding Company

Because of the difference in structure between companies and limited partnerships, limited partnerships and its partners will not be required to provide details of their ultimate holding companies.

Whilst these changes are still in a Bill form, they may, if passed, increase your compliance obligations.

If you think that these rules may affect you please contact us, we are here to help and make sense of the various complexities.